In Building Local Marketplaces, a Choice of Chicken or Egg

The success of Uber and Airbnb have spawned a deluge of startups that have replicated the on-demand marketplace model across a range of verticals. But developing marketplaces locally requires a deft approach to scale that balances a network’s need for liquidity with a startup’s desire for growth.

During the Street Fight Summit in New York Tuesday, OpenTable SVP of marketing Scott Jampol, Handy COO Umang Dua and legal directory Avvo’s Leigh McMillan joined moderator Greg Sterling to discuss the tactical challenges in building marketplaces — namely, balancing the needs of supply and demand.

OpenTable, one of the earliest marketplaces, found its early traction by providing restaurants with operations software as well leads. Jampol, a six year-veteran at the reservations firm, said that the operations product allowed the firm to draw local restaurants without consumer traffic.

“As the network has matured, the value is more even, and the business becomes much more about the demand that we can put into some restaurants,” said Jampol. “If you’re thinking about marketplaces, you need to solve problems that might not be related to the two sided equations.”

For OpenTable, that product was a more simplified reservations and table management system for small restaurants. The product worked independently of its network, and helped not only in driving value independently of the network but also helped create switching costs, says Jampol.

But marketplaces eventually need to drive activity on the network. Dua, a co-founder at Handy (which grew its business building a marketplace for home cleaning but has since expanded) said that in the company always focuses on generating supply when it enters a new market or vertical.

Dua says Handy, which raised $30 million series B round led by Steve Case’s Revolution Growth fund, uses existing channels such as Craigslist to find service providers in new markets. “For us, it starts with the question of how do we onboard a certain amount of supply — the bare minimum you need,” said Dua.

That’s the key difference between a marketplace and directory, says McMillan, VP of marketing at legal directory Avvo. A marketplace provides an experience which is dependent on the participation of both consumers and providers.

“A director aggregates information; a marketplace enhances it,” says McMillan “A marketplace needs to provide an economic advantage to both sides.”

The challenge for local marketplaces compared to more virtual companies such is that liquidity only goes so far. Companies need to solve the supply and demand issue in hundreds of individual markets.

As OpenTable started to expand in the late 2000’s, Jampol says the company focused on driving density through its salesforce. He says the management team created geographic constraints for their sales team, only paying commissions for restaurants brought out within a given area.

“I can’t stress the importance of concentration enough,” said Jampol. “You tend to think about growing quickly and having a landgrab, but it comes at cost of the depth of that experience.”

Steven Jacobs is Street Fight’s deputy editor.